Migration and Macroeconomic Performance in New Zealand: Theory and Evidence (WP 14/10)

Abstract

New Zealand immigration policy settings are based on the assumption that the macroeconomic impacts of immigration may be significantly positive, with at worst small negative effects. However, both large positive and large negative effects are possible. Reviewing the literature, the balance of evidence suggests that while past immigration has, at times, had significant net benefits, over the past couple of decades the positive effects of immigration on per capita growth, productivity, fiscal balance and mitigating population ageing are likely to have been modest. There is also some evidence that immigration, together with other forms of population growth, has exacerbated pressures on New Zealand's insufficiently-responsive housing market. Meeting the infrastructure needs of immigrants in an economy with a quite modest rate of national saving may also have diverted resources from productive tradable activities, with negative macroeconomic impacts. Therefore from a macroeconomic perspective, a least regrets approach suggests that immigration policy should be more closely tailored to the economy's ability to adjust to population increase. At a minimum, this emphasises the importance of improving the economy's ability to respond to population increase. If this cannot be achieved, there may be merit in considering a reduced immigration target as a tool for easing macroeconomic pressures. More work is required to assess the potential net benefits of an increase in immigration as part of a strategy to pursue scale and agglomeration effects through increased population, or whether a decrease in immigration could facilitate lower interest rates, a lower exchange rate, and more balanced growth going forward.

Acknowledgements

This paper has benefited greatly from discussions and comments, many of which have been substantive. My thanks to Rienk Asscher, Anne-Marie Brook, David Brown, Nick Carroll, Enzo Cassino, Linda Cameron, Andrew Coleman, Paul Dalziel, Graeme Davis, Shamubeel Eaqub, Matthew Gilbert, Michael Hampl, Christine Hyndman, Natalie Jackson, Tracey Lee, Geoff Lewis, Geoff Mason, Mario di Maio, Dave Maré, Vinayak Nagaraj, Ganesh Nana, Jacques Poot, Roger Procter, Michael Reddell, Paul Rodway, Mark Smith, Steven Stillman and Phil Veal for helpful suggestions. I am also grateful to Hannah Benbow, Rietta Barnard and Bradley Rose for assistance with accessing documents, Frédérique Bertrand for help with data queries, and Kelly Shen for formatting the paper. All remaining errors are my own.

Disclaimer

The views, opinions, findings, and conclusions or recommendations expressed in this Working Paper are strictly those of the author(s). They do not necessarily reflect the views of the New Zealand Treasury or the New Zealand Government. The New Zealand Treasury and the New Zealand Government take no responsibility for any errors or omissions in, or for the correctness of, the information contained in these working papers. The paper is presented not as policy, but with a view to inform and stimulate wider debate.